A Sickening Deficit

A key driver behind the president’s health care agenda is to, “help bring our deficits under control in the long term,” and yet the latest health care bill will reach annual savings of only $18 billion by the end of the decade. Before deficit hawks try to applaud Congress for fiscal responsibility, Americans should recognize that the recently enacted stimulus bill will push up the deficit by $140 billion a year.

The “American Recovery and Reinvestment Act of 2009″ (ARRA), was rushed through Congress on the grounds that fast-acting and temporary measures were needed to counteract the recession. The bill included $288 billion in tax relief, $144 billion in transfers to states and $357 billion in federal spending.

However, many of the provisions in the stimulus will not be temporary. Less than two weeks after ARRA was enacted, the Obama administration released its Fiscal Year 2010 Budget, which proposed to make five major components of the stimulus bill permanent, at a cost of $94 billion per year. Permanently extending the Making Work Pay Credit, the expansion of the Earned Income Tax Credit and the refundable portion of the child tax credit, and the expansion of the American Opportunity Tax Credit would cost $82 billion per year. Expanding Pell Grants for college education would cost $12 billion annually. All told, the Obama administration’s budget seeks to make at least 37% of ARRA’s spending and tax cuts permanent on an annual basis.

Not only has the stimulus bill failed to turn the economy, but it promises to be a permanent drag.

A number of other provisions are likely to have a permanent impact on the budget as well, since it would be political suicide to eliminate them now that they are enacted. Permanently extending just a subset of tax or spending provisions could further enlarge the deficit by over $48 billion per year.

–The Obama administration has recently expressed support for extending the $8,000 first-time home-buyer credit that is set to expire on Nov. 30, 2009. A permanent extension could cost $6 billion annually.

–Second, the stimulus package provided additional aid to laid-off and low-income workers and their families by subsidizing the cost of COBRA benefits, granting more funding for Supplemental Nutrition Program (food stamps) and excluding $2,400 of unemployment benefits from gross income calculations. Although the number of eligible workers and families will decline as the economy recovers, we estimate that the annual cost of extending these popular programs to be $12 billion per year.

–Third, education was a major theme of the stimulus bill and $100 billion was directed to this cause. While we do not assume that all of this spending is to be permanently expended, the termination of additional funding for disadvantaged children and special education would be particularly unpopular; an extension of these programs would increase spending by an estimated $12 billion per year.

–Extending funding for a subset of other federal programs run by the National Institute of Health, the National Science Foundation and the Department of Labor, among others, would add another $18 billion in permanent spending.

In total, we have identified policies in the stimulus bill that will add over $140 billion annually to the federal deficit forever, representing roughly 57% of the total average annual cost of the bill. It is important to stress, however, that this estimate is likely the floor and not the ceiling for what this bill will eventually cost. Our analysis was restricted to those policies estimated to cost $1 billion or more. But this legislation will create hundreds of distinct programs. Furthermore, we also excluded policies that were included in the stimulus bill but that existed previously, such as the alternative minimum tax patch and an array of energy tax provisions. Finally, we generously assumed that many other programs that potentially could be extended would not be, including the $144 billion in temporary aid to the States and the one-time $250 payment to Social Security recipients that now appears likely to reoccur at least in 2010.

While there is no question that rising health care costs pose a serious threat to our fiscal outlook, the health care proposals being debated in Congress will do little (if anything) to solve the problem. While this debate consumes our public attention, don’t forget that a bigger fiscal wound has already been inflicted. Not only has the stimulus bill failed to turn the economy, but it promises to be a permanent drag.

Alex Brill is a research fellow at AEI. Amy Roden is a program manager in economic studies and Jacobs associate at AEI.